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SCOTUS: California Tax Unconstitutional

May 6, 2019

 

WASHINGTON, DC: If you open up a store, sell goods, or own real property in California, you can reasonably expect to pay California’s “doing business” tax. But what if you merely have a passive ownership stake in a limited liability company that does business in California?

 

Given that the imposition of a doing business tax on a purely passive investment is unconstitutional, the answer should be no. But in 2014, the California Franchise Tax Board interpreted “doing business” so broadly any company that is a member of an LLC must file a California tax return and pay all applicable taxes and fees as if it is actually the company doing business in California.

 

On top of imposing the unconstitutional extraterritorial tax, California takes extraordinary steps to enforce it – including taking the money without warning and without process. For example, if a company does not voluntarily pay the assessment, California locates any funds the company holds in out-of-state bank accounts and demands that the bank transfer the funds to the State. And if the bank refuses, California takes the money from the bank’s own accounts instead. California effectuates these extraterritorial seizures ex parte, without notice, without warrant, and with no opportunity for judicial review.

 

The State of Arizona recently brought a lawsuit against the State of California challenging this unconstitutional tax. Because the action is between two states, Arizona went directly to the U.S. Supreme Court and asked it to hear the case and Southeastern Legal Foundation, joined by the Cato Institute, filed an amicus brief supporting Arizona.

 

Click here for SCOTUS amicus brief

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